NCPA - National Center for Policy Analysis

Consumer Demand Is Driving Drug Spending Up, Say Researchers

July 17, 2001

Increased consumer demand for prescription medications, particularly new products, is the primary factor behind managed care plans' increased drug spending, say University of Michigan researchers.

The researchers' study in the American Journal of Managed Care used 1996 to 1998 prescription cost data from one unidentified national employer with 44,228 hourly and 75,433 salaried employees to determine why health plans' spending on prescription medications is rising.

  • Over the 2-year period, the managed care plans in the study saw sharp increases in prescription costs -- up 34.8 percent for Health Maintenance Organizations (HMOs) and 30.7 percent for preferred provider organizations.
  • The increased spending was largely due to higher consumption of new and existing drugs, rather than increasing prices for medications.
  • During the same period, traditional fee-for-service plans in the study experienced a 17.3 percent increase, almost exclusively due to prescriptions for new drugs.

Thus greater employee demand for prescription medications, as opposed to price increases for existing drugs, is driving much of the trend toward higher spending on drugs, the study's authors conclude.

The authors could not say whether one type of health plan was better than others in controlling drug expenditures because they didn't have data on "case-mix" differences among the plans. But those differences would have to be "substantial" to explain the wide variation in spending growth, they say.

Rising drug expenditures may not be all bad, the team suggests. "Pharmaceutical spending may reduce spending on other types of health care services and, more importantly, may improve health outcomes," they write.

Source: Reuters Health, "Demand fuels sharp rise in health plan drug costs," July 13, 2001; based on Michael E. Chernew, Dean G. Smith, Duane M. Kirking and A. Mark Fendrick, "Decomposing Pharmaceutical Cost Growth in Different Types of Health Plans," American Journal of Managed Care, July 2001.


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